Illusion and Reality

238542495_21bb5b1747_oMuch has been made of the role of Trump as a divisive force in American politics.  While there is no question about Trump’s behavior, blaming Trump for divisiveness makes this seem like a one-of-a-kind personality problem.  That’s an all too common illusion.  The reality is a much bigger story.

Growing up in the post-war US it is easy to forget that democracy and rule of law are by nature fragile.  For most of human history the rich and powerful have just run things for their benefit.  Rule of law gets in the way, and those who expect to be in control tend to find that intolerable.  As has been carefully-documented, forces for oligarchy are more powerful now than they’ve been for quite some time in this country.  Growing inequality and the Citizens United decision show both the current power of those forces and their ability to get more of it.  That is today’s reality.

The facts in this piece are not new but haven’t gotten enough play.   The main reason is that the illusions in the foreground—Trump’s idiocies or the Republican Party squabbles—drown out the rest.   It’s worth going through these basics, because otherwise (as with divisiveness) it’s too easy to believe nonsense.

The major players in the game are well-known, but their clout and goals are underappreciated.  The starting point is the Koch organization and its allies.   The Koch organization channels money from ultra-rich donors into a political organization with 1600 employees and a bigger budget than the Republican party itself.   Most of their money is “dark”, passed untraceably through nominally charitable (but tightly-controlled) think tanks into Political Action Committees.  The Kochs were responsible for the Republican takeover of Congress and of the state legislatures—they focused unheard-of money on the states prior to 2010, so as to be able to gerrymander based on the 2010 census.  Citizens United showed their power in the Supreme Court—Roberts and Alito were both named via the Koch-funded Federalist Society—and the Gorsuch relationship is even closer.  Finally all of that speaks through their primary propaganda channel—Rupert Murdoch (net worth $14.7 B) and Fox News.

The stated goal is to return the US to something like the 19th century Gilded Age, where a handful of rich individuals ran the country through money and influence.  The Progressive Era, which followed and limited their control, is viewed as the start of a national decline.  Any social welfare spending or constraint on business saps the strength of the country.  Overall, a robber-baron economy even Adam Smith wouldn’t endorse.

It was recognized early-on that such a program would not be popular, so it was necessary to provide a cover.  For that purpose (as documented) they systematically created an alternative reality, developed by the think tanks, promulgated by Fox News, and represented politically by front organizations—most notably the Tea Party and Donald Trump.

Strangely, it is still not common knowledge that the Tea Party was created and funded by the Kochs.  Trump is a different story.   He was not their first choice, but with their guy Pence in the background, he proved to be an almost ideal populist mask. It’s no accident that the one major legislative achievement of the Trump administration was the passing of their tax cut.   That was not AN issue—it was THE issue, and the achievement was not Trump’s but theirs.   It signified their full control of the Republican Party.

The features of the “alternative reality” are worth describing in more detail, as they cover a good bit of our daily cacophony.  This is less a system of beliefs than a framework for propaganda:

  1. The single most important goal has been to divide and conquer the electorate by creating divisions and mutual enmities among groups. Divisiveness is not a byproduct but an explicit goal.

Racism was one starting point.   Under Obama is was easy to claim that blacks were cheating to get more than their fair share.  Large fractions of the country still believe, quite incorrectly, that the whole social welfare system exists primarily for blacks.  Even the non-Fox press does a good job of reinforcing that misunderstanding.

It was only one step beyond that to go after the past alliance of liberals and the working class.  No message has been more enthusiastically repeated on Fox News than “they hate us and think we’re stupid”.  That message is neatly aligned with racism—they dress differently, they listen to different music, they’re not us—they’re the enemy.   They stole your jobs.  Cutting them down to size is at least as satisfying as actually getting a job.  What’s more education is bad:   It just turns your kids into people like them!

Finally this all gets reinforced with fear.  This is a very dangerous country.  Blacks and foreigners are all out to get you.   You need to know who your friends are.

So discussions of divisiveness or “polarization of the electorate” are missing the point.  Much of the left is if anything trying too hard to understand where they went wrong with the working class.   The other side has been taught—intentionally and with all of Murdoch’s resources—to hate them and everything they stand for.

  1. The other major message promotes the oligarchs themselves.

Job creators are god-like figures who dispense jobs as gifts.  Growth, produced by them, is the miracle solution to all problems.  You don’t need ideas or plans, just them.

Government is corrupt and inept.   Sometimes, as with the EPA, it is actively malicious.  It makes laws that impinge on our freedoms.  It wastes money with social welfare programs for ungrateful non-white cheats.  Education is useless indoctrination.  Even the police cannot be trusted to do their job—we need more good people with guns.  And everything government does is financed with money stolen at our peril from the job creators.

So we need to cut their taxes, eliminate constraints on their behavior, and make sure they get as much of the pie as possible.  Further it turns out that all government services they don’t need (healthcare, social security, education, …) are candidates for cuts.  We just need defense and self-funded infrastructure (to go where the money is).

 

That’s where we are.   Trump and the Republicans may get all the press, but the real powers know exactly what they’re worth:  Trump is a loose cannon but easily manipulated, and the Republicans are replaceable buffoons already scared of their next primaries.

The 2018 and 2020 elections will be fought against the Koch organization and Murdoch for control of the country.   Given that democracy is on the line, the rest of us had better win.

Shock and Awe

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It’s odd how people seem surprised at the level of corruption and outright incompetence coming from the Republican party.  We need to remember a bit.

The arrival of George W. Bush was not as traumatic as Trump’s, but then as now we got a new troupe of players (remember the neocons?) who were convinced they were geniuses, and that every other idea represented the stupid old world they were here to transcend.   That affected both the economy (government regulation does nothing good) and international relations (let’s remake the world for freedom and democracy).

It took a little while, but they were a catastrophe on all fronts.  The deregulation movement’s hands-off treatment of the economy produced a new, unregulated banking system (mortgage-backed securities) that ultimately crashed, producing the worst downturn since the great Depression.   $6T of “safe as banking” securities were wiped out.  Only the Democrats’ support of the bank bailouts kept us out of a real depression.

And of course we fought a $2T war that was justified by lies, produced no benefits to the US, and undermined US interests everywhere in the Middle East.  (ISIS was one consequence.)  Even today it’s hard to know what was really behind that war, but it is a fact that the only place in the world where people think it was anything but oil is here!

There are two other important but largely unstated points to be made about that war:

– That fact that it was unbudgeted contributed mightily to the difficulty of recovering from the crash.  In general terms governments need to act countercyclically, i.e. they should save in good times, because they need to spend in bad.   This is not rocket science, but we did exactly the opposite and in a big, untransparent way.   So recovery from the crash had to be all deficit, which made it easier for the Republican balanced-budget hypocrisy to prolong the pain.

– The result of the war was not just what was done, but also what couldn’t get done.  That affected the Middle East, where the greatest opportunity for change was for US money to grease the peace process.   That opportunity was lost forever.  ($2T would have created a true land of milk and honey!)  But that wasn’t the end of it.  That lost money also affected US domestic finances as well.   Post 2008 we find we have money for nothing, not even education.  Part of that problem has been Republican party priorities, but the fact remains we are not the first country to impoverish ourselves with a stupid war.

 

Fast forward to the present.   We’ve got a new bunch of geniuses who have no need for either information or expertise.  They’re smart!

We are now at a stage like the “shock and awe” of the Iraq war.  Reality has not yet had time to intrude on the fantasies.  But we need to remember, it can be that bad!

Where will we go from here?   The picture has a lot in common with the story just told:

– The economy

We seem to have learned nothing from 2008.  With the tax plan we are stimulating the economy at the wrong stage of the business cycle and running a deficit to do it.  Further we are removing Dodd-Frank and everything else enacted to control bad behavior.   There’s also little evidence that these people will do what it takes in case of a crash.

– War

This administration seems even more cavalier about war than Bush people.  We’ve had continuing belligerence with North Korea and Iran and a budget with an untargeted military buildup.  There’s real risk of a crazy war on impulse—with as little planning or understanding of consequences as last time.   We have to hope it won’t be nuclear.

– Russia

Russian is a constant adversary, and our buddy-buddy relationship with Putin is problematical.  Russians are proven experts in cyberwarfare, and the demonstrated impact of viruses points out the threat.  There is even a possible Russia-North Korea connection.  We stop watching them at our peril.

– Climate change

The evidence behind climate change is more than considerable.  As a risk, it is well past the point where any serious business would start paying attention to it.   We have instead decided we’re too smart to have to think.   We are risking our own future, and handcuffing our businesses that would be part of the solution.  The Chinese have taken our place and are running with it, while for us even planning is out of the question.  This is a double whammy—more heat, storms, and drought combined with loss of industrial preeminence.

Those items are not just speculation.   We’re all set to pass the economics into law.  The war rhetoric is if anything more pronounced than with the Bush administration.   For climate change this is stated and active policy.    The Russian case is a little different, but it underlines the seriousness of the dangers.  We just barely escaped with Bush; this time it looks worse.

Again we’re powerless in dealing with geniuses who can’t be bothered with facts, expertise, public opinion or anything else that gets in the way of their greatness.  We can have no confidence, for example, that Trump either understands or takes seriously the fact that a nuclear attack on North Korea will have consequences for the US even without retaliation.  Trump’s statement on deregulating Wall Street, just like his statement on leaving the Paris Accords, acknowledged no risks.

It’s all too easy to forget the past, but we’ve learned that such “genius” has consequences.  The end of this story will not be pretty.

No segment of the population—Republican or Democratic—should believe anything else.

Inequality

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Inequality is a term so apparently self-evident that it shows up everywhere in political discourse on both the left and the right.  Much of that discourse, however, is so simplistic that it is easily dismissed by the other side:

– For the left, inequality is morally wrong—despite the fact that it can accompany rising living standards even for the people on the short end of the stick.   A fair number of the 238 cities vying for Google’s second headquarters would probably see a rise in both inequality and the general standard of living if they won (just based on an influx at the high-income end).

– For the right, inequality is good since rich people are the “job creators”, so the happier they are the better—despite the fact that there is no evidence for that logic at all. It also seems rather odd to assert that businessmen are so incompetent as to make hiring decisions based on personal satisfaction rather than opportunities to be staffed.

Despite those points, the effects of inequality are neither uncertain nor hard to understand—it’s just easy to be sloppy about it.  This note is an attempt to be more real.

First one must acknowledge that inequality itself is neither bad nor good.  What matters is the well-being of the population, including in particular those on the lower end of the scale.  For people like Steve Jobs (always the first example) personal wealth is the result of creating an economic engine with benefits to many.  It’s hard to argue with that.   And you can push it one step further and say that the incentives for innovation in the US economy are an important reason why the US has been able to stay ahead of the technology curve.  You can even say that the potential for success is an important part of well-being for many people, so that an economy of pure equality—even in the abstract—is not necessarily a good thing.

None of that, however, tells you very much about the effects of growing inequality in the US.  First of all let’s be clear that the increase in inequality is well-established and true for any definition of wealth (income, assets, …) you might want to use.

Further rising inequality here has been no obvious driver of innovation—on the contrary with increasing inequality the US economy has become more and more dominated by large entrenched companies, with less and less room for new companies to succeed.   And no one can argue that the inequality has improved opportunities for people to succeed—on the contrary US society has become less upwardly mobile by every measure.

As for the effect on peoples’ finances—for that there is no ambiguity.  Some of the most telling statistics came in a recent paper examining per-adult income growth for the bottom 50% of the US population.  It turns out that since 1980 there has been no per-adult income growth for the bottom 50%!  That is compared with a 64% increase for the upper 50%, and vastly more for the top 1% (see the chart at the beginning).  Note this was a period when women entered the workforce in large numbers.  Since we’re dealing with per-adult statistics, we’re saying that for the bottom half of the population the net effect of women working was just to keep things from getting worse!  As another example of the same thing—essentially all the benefits of the 2008 – 2015 recovery went to the top 1%.

So what is going on with inequality and what should we think about it?  In broad terms there is no secret.   We can start with the usual three inter-linked suspects:  automation, globalization, and de-unionization.  All of those decrease the power of lower-skilled workers in dealing with management, so growing inequality is no surprise—and the effects are continuing.  While those effects have been felt everywhere, the response of government to that situation has been different in different countries.  In most countries government has attempted to cushion the blow.   That has not been wildly successful, but intervention has at least damped the situation.

In the US the exact opposite has happened.   Perhaps because of the horrendously expensive electoral process here (assisted by Citizens United), we have seen a precipitous rise in the political power of the increasingly rich top.  And political dialogue has naturally evolved to reflect their interests.  Even previously sacrosanct services such as education have suffered loss of public financing; the student debt crisis is an obvious sign.  If you make a list of the public services that the ultra-rich don’t need, e.g.

– Education

– Healthcare

– Retirement

– Social welfare

– Broad-based infrastructure,

it is obvious that all of it has become controversial.   That is contrasted with an area such as defense, where we’re looking for a buildup.

While Trump’s tax plan has been sold as a job creator, that’s not where it came from.  No one is hiding that fact that it is the Republican donors’ tax plan, and its benefits to anyone else are ancillary—and to say the least unproven.  Trump himself came on-board late in the game and conveniently seems to believe that whatever is good for him personally is best for everyone else.  The tax plan shows inequality as a self-reinforcing trend:  more money => more power => even more money.

The bottom line is that inequality in the US is in the process of making this a very different country.  For the poor it means simply less support, though the US has never been very good at that.   The big difference is for the middle class.   Services that they have traditionally relied upon are becoming problematical, and the tax system is increasingly skewed to benefit the rich.  Furthermore the ongoing effects of automation, globalization, and de-unionization have made the threat of falling out of the middle class very real.   It should be emphasized that automation in particular is accelerating as an issue, with artificial intelligence pushing the threat up the income scale.  A recent report predicts almost one-third of existing US jobs could be lost to automation by 2030.

And there’s another problem as well.   Adam Smith himself pointed out that the private sector cannot be trusted to provide the proper environment for its own success.   He saw both policing the private sector (e.g. anti-trust, free entry) and education (to sustain the private sector) as tasks for government.   So growing inequality—with the ultra-rich running the government for their own sake—is not only a threat to the well-being of the population, it is a threat to the vitality of the economy itself.

While solutions are outside the scope of this note, we must recognize that rising inequality puts us on track to become a second-class power with few rich and many poor.  That, as noted last time, is our future as banana republic.

Some History and Consequences of a Tax Cut

1929

In the years since the Great Depression economists of all stripes have come to a consensus about what happened.   Wild speculation produced a crash.   That led to intense stress on the banking system.   The Federal Reserve (as primary villain) was unwilling and unable (because of the gold standard) to provide support.   So the banks failed, and the rest of the economy collapsed.  National income was down a massive 60% by 1932.

The collapse originated in the US and was much worse here than elsewhere. Germany, still paying World War I reparations, was a special case and fared badly.  It is important to remember that without the 1929 crash, Hitler would have remained a curious side-show.

Recovery in the US took a full decade.  There was a serious blip in 1937-38 when Roosevelt dialed back on stimulus and a GDP slowdown followed.  International trade dwindled in the 30’s, as many countries instituted protectionist barriers.   The US wasn’t fully out of the depression until the second World War.

 

2008

Fast forward to the crash of 2008.   The banking system was again central, because mortgage-backed securities brokers had become unregulated de facto banks.  (Why should businesses earn nothing on cash when mortgage-backed securities paid real interest and were rated “just as safe”?)  When the deteriorating economy led to large-scale mortgage defaults, the mortgage-backed securities collapsed in value and trillions of dollars of supposedly safely-banked assets disappeared.

People running things had fortunately learned the lessons of 1929, and stepped in immediately to keep the banking system afloat and pump money into the economy to prevent a depression.  That stopped things going from bad to worse—very painful but not a depression.

 

Crisis and Recovery

Even at the beginning, however, something strange happened in this country.   At the very end of his presidency, George Bush did the right thing  (for once) and in the face of disaster introduced legislation to keep the banks afloat.  Despite advice of economists, his own party refused to support him—claiming to fight socialism.  However 172 Democrats and 91 Republicans did support the bill, and by a 263 to 171 vote helped pull the country back from the brink.

The episode seemed odd at the time.  But with the start of the Obama presidency and the new Congress, it quickly became clear what had happened.   That had been a transitional moment.  The old Republican party that at least cared (conservatively!) about the well-being of the country was no more.

The new Republican party, more and more a creature of the Koch machine, had only one goal—cutting taxes on the small group of ultra-rich backers who now owned the party.   That translated immediately to a surprising position.   Mitch McConnell (always quick to know which way the wind was blowing) later summarized it as “The single most important thing we want to achieve is for President Obama to be a one-term president.”  Private statements of position were even stronger. There would be no cooperation on anything—even on recovery from the recession.  Obama wouldn’t give them the tax cut, so it was scorched earth.  Republicans at the time trotted out ideological objections to stimulus—which the current Republican enthusiasm for both presents and deficits shows up for the hypocrisy it was.   Everything that kept the country going had to be passed over Republican opposition.

Even with a Democratic majority, that limited what could be done as stimulus.   At the same time the Kochs founded and funded the Tea Party as an apparently populist, anti-spending front group.  Slow growth plus anti-establishment rhetoric plus an unprecedented dose of Koch money (enabled by Citizens United) helped Republicans gain control of the House.  Keeping the country poorer was a rousing success!

After Obama was reelected Republicans doubled down on slowing the recovery and preserving the remaining pain.  Their ploy was a commitment to balanced-budgets (today of course demonstrated to be bogus), including even a proposal for a constitutional amendment.  On that basis they deliberately blocked any further stimulus or social programs (such as Obama’s State of the Union proposals for community colleges and daycare)—starving government to sow discontent for the election.   By 2016 they had held the country hostage to their tax cuts for the full six years they controlled Congress.

Trump wasn’t their chosen candidate—too much of a loose cannon—but he would do.   He was an even better populist front than the Tea Party.  He didn’t even notice the irony in his “slowest recovery” claims.  Pence was their guy all the way, and Trump picked a cabinet full of other Koch people.  On tax cuts there was no problem managing Trump.   He already believed anything good for himself was good for the country.  The tax cut plan is now here.   It is worth more than $1B for Trump himself, and is everything the rich donors could have hoped for.

You have to hand it to the Koch machine.  All the distributed power in the power in the American political system has now been centralized and controlled.  Local, state, Congress, the Presidency, the Supreme Court—the Koch organization has money in all of it.   More to spend than the Republican party itself, and all under strict control.  A few hundred fabulously wealthy people are running the USA for their benefit.

 

Now

That’s where we are.

For the tax cut, what’s on the table is an astonishing giveaway of the country to the richest few.   The asserted benefits to the middle class are nothing but after-the-fact propaganda.  There is no logical or historical justification for claiming that upper class tax cuts produce jobs.   Business tax cuts, while they sound good, are actually no better.   Businesses hire people because of opportunities, not cash on hand.  With today’s low interest rates the cost of capital is not a big barrier to new opportunities, so tax cuts will end up going to the investors.

This is not really a stimulus package, and it’s a myopic approach to our real problems in any case.  One reason the recovery hasn’t helped everyone is that the Republicans’ past financial lock-down has prevented whole categories of problems from being addressed.  The economy is changing and issues such as skills mismatch, automation, educational opportunity and even infrastructure aren’t addressed just by throwing money at the private sector.

There’s another problem too.   All that tax cut money will now be chasing investment—a dangerous invitation to speculation.   And we’re incurring new large deficits to pay for it at the wrong time in the business cycle.  The country is out of recession, and large deficits in good times are bad.   When our speculative bubble comes to an end, it will be all the harder to find the stimulus money to get up off the floor.

There is also a real question about who’s going to be around to help.  Remember the disastrous Federal Reserve behavior in 1929 and the unanimity it took to get back from 2008.   Janet Yellen may not be retained as Federal Reserve Chairman when her term expires next February.  One prominent candidate to replace her has no specialist background in economics and opposed all stimulus after 2008 out of an unsubstantiated fear of inflation.   Trump has not chosen his nominee, but it’s something to worry about.

Too many pieces from 1929 are coming back together. The ultra-rich are getting their tax cuts.   By all evidence there is little interest in learning from the past and even less in looking out for the lot of the rest of us.

This is it!

This is it!  Finally it’s here.

After six years of holding the country hostage (no question now about the meaning of “party of no”)—

After thousands of Fox News stories full of arrogant and nasty liberals—

After untold campaign contributions—

We finally have what we’ve waited for.   The dearly-bought gift—the tax cut, our tax cut has arrived in Congress!

 

Think about what we’ve done to get here.  First some of the ground work:

– Republican Supreme Court justices Roberts, Thomas, Alito, Gorsuch.

– Citizen’s United—liberating our money as protected free speech.

– The unprecedented Koch organization—funded by billionaires and with a staff of 1600 and billion-dollar budgets to control state and federal legislatures.

– A full complement of Koch people (e.g. Pence, Pruitt) in Trump’s government.

 

Then our messaging with Fox News and Rupert Murdoch leading the way:

– First one fabulous job of divide and conquer.  We’ve made “liberals” even more detestable than “welfare queens”.   What a line we’ve got: “They’re laughing at us and think we’re stupid.   They’re stealing our jobs and our money.  Can’t believe a word they say.  Our team will bash their heads in when we win!”  We’ve even got real liberals apologizing for our stereotypes!  And then there’s racism…

– Next the subtler part—governments can do nothing, everything they offer is either worthless or for someone else.  There’s quite a list of things governments can’t do:  education, social services, medical care, even police (we just need “good people with guns”).  Funny thing about all those wastes of taxpayer money—they’re things we’re already doing for ourselves.

– Finally a bit of warm and fuzzy nonsense.  Jobs are gifts from corporations and rich people.   Make us rich and we’ll take care of you!

Sounds like a tax plan.

 

And look now at what we’ve got.  Let’s count the tax cuts:

– Estate tax.  Only helps families with at least $10 M to pass on.  Worth $1 B for Trump himself.   Just for us.

– Tax rates.  The top bracket is down to 35%, but that’s just the beginning.  We’ll really get 25% with the new passthrough loophole (our lawyers will certainly take care of any fine print).

– Corporate tax rates.   We’ve got the clout to get most of this as dividends or stock repurchases.

– Deficits.   That’s a particularly good one.   Those nonsensical growth predictions are just one more piece of the pie.  The deficits will mean cuts in services and correspondingly lower taxes going forward!

It’s actually marvelous how this has worked out.   We’ve got a tax cut before there’s even a real budget!  Exactly the way the world should be.

 

Where is all this going?  Funny you should ask.   There’s an article in today’s NY Times talking about it.   It seems Mexico is actually doing something right.   They’re not wasting money on parasites.   People like us live in walled communities with their own security and service.  Some of it they pay for, and the state does the rest. And they pay practically no taxes!  The world as God created it!

 

The tax cut has come.   We are saved.